The Bull

Saturday 25

November, 2017 1:11 PM



Spreads

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What does it mean?

Forex is always quoted with bid and ask prices, similar to equity markets. The difference between the bid and ask is the spread..


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TheBull says...

Never believe the statement that forex trading is commission free. The last time we looked, forex trading wasn’t a charitable enterprise.

What these brokers are endeavouring to say is that while, no, they don’t charge a traditional brokerage – in the sense that you pay $30 to buy and sell forex – the commission instead is built into the spread.

In forex-speak a spread is measured in pips and relates to the difference between the value of the bid and offer. For example, if the Pound Sterling against the US dollar is 1.7443/48, a trader is able to buy the Sterling at the offer price of 1.7448 and sell at the bid of 1.7443. The spread in this example is the difference between the bid and offer, and is five pips.

Most brokers will offer a narrow spread for the most liquid currency pairs – as low as a 2 pip spread for the AUD/USD, EUR/USD and EUR/GBP. In a game where every pip counts, these currency pairs are generally more popular with active or day traders. Less liquid currency pairs such as the USD/CAD (the CAD is the Canadian dollar) will generally incur a wider spread.

First decide which currency pairs you intend to trade and then compare the spreads between brokers for this particular currency pair. Also, if you are a frequent trader don’t forget to prompt your broker for any special deals or rates.

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